Schneiderman seeking $300M against Sprint (updated)

Attorney General Eric Schneiderman is announcing a “first-of-its-kind” lawsuit against Sprint-Nextel Corp. for “deliberately under-collecting and underpaying millions of dollars in New York state and local sales taxes on flat-rate access charges for wireless calling plans.”

He’s alleging underpayments of more than $100 million — roughly 25 percent of what it owed — a loss that hit state coffers as well as localities and school districts. In a teleconference Thursday morning, Schneiderman said Albany County lost out on as much as $535,000 in revenue over the seven-year period under consideration.

The New York False Claims Act, a measure authored by then-state Sen. Eric Schneiderman and passed in 2010, allows the AG to seek triple damages, plus interest and penalties.

Sprint’s New York spokesman did not immediately respond to a request for comment.

From the AG’s press release:

“By deliberately evading sales taxes, Sprint cost state and local governments over $100 million that could have been used for critical services and much needed resources that our state and its citizens need given the challenging economic times we are in,” said Attorney General Schneiderman. “The message of our office is clear – tax dodging is not acceptable and we will use every tool in our arsenal to make sure that taxpayers’ money is protected, and that honest businesses and consumers are not placed at a disadvantage for collecting and paying their fair share of taxes.”

The suit claims that Sprint charged sales tax on only a portion of its flat-rate fees, in what the AG said was a violation of “extremely clear and unambiguous” state tax law.

Schneiderman’s office says that all of Sprint’s major wireless competitors — Verizon, AT&T, T-Mobile and MetroPCS — have followed the law regarding the taxes in dispute. Schneiderman said that internal documents reveal that Sprint took this action in order to artificially bring down costs to gain competitive advantage.

“Everyone else had no trouble figuring out what the tax law was — except Sprint,” Schneiderman said. In addition to any settlement, Schneiderman will ask the court to allow customers “misled” by Sprint to dump the carrier without imposing termination fees.

The suit was prompted by a whistleblower complaint from Empire State Ventures, which if Sprint loses the case stands to make between 15 percent and 20 percent as determined by the court. He noted that the company had been advised of the potential illegality of its practices as early as 2009 and after, “to no avail.”

Schneiderman said this aspect of state law could be used in the future on issues like school funding and Medicaid. “We’ve been taking a hard look at school funding, how it’s being spent and whether there are service providers to schools that are overcharging or under-delivering,” he said.

Update: Here’s the statement from Sprint:

“This complaint is without merit and Sprint categorically denies the complaint’s allegations. We have collected and paid over to New York every penny of sales taxes on mobile wireless services that we believe our customers owe under New York state law. With this lawsuit, the Attorney General’s office is claiming New York consumers, who already pay some of the highest wireless taxes in the country, should pay even more. We intend to stand up for New York consumers’ rights and fight this suit.”

According to the Attorney General’s complaint, starting in 2005, Sprint illegally failed to collect and pay New York sales taxes on an arbitrarily set portion of its revenue from these fixed monthly access charges. To carry out this plan, Sprint repeatedly and knowingly submitted false records and statements to New York State tax authorities. Sprint concealed this practice from taxing authorities, its competitors, and its customers.

Sprint’s scheme is ongoing. Sprint did not correct its sales tax practices when it was informed of its illegality, and it has not corrected them even today. As a result of Sprint’s unlawful actions, its underpayment of New York sales taxes is growing by about a $210,000 every week, over $30,000 a day.

The decision not to collect and pay these taxes arose out of a nationwide effort by Sprint to obtain an advantage over its competitors — not by cutting its prices or offering better service — but by failing to collect and pay sales taxes its competitors properly collected and paid. Right before deciding to underpay its taxes, Sprint concluded that this practice would position its calling plans as cheaper than competitors’ plans by $4.6 million per month, collectively, because of sales taxes not collected and paid.

The Attorney General’s lawsuit is the first ever tax enforcement action filed under the New York False Claims Act. The Act is one of the state’s most powerful civil fraud enforcement tools because it allows whistleblowers and prosecutors to take legal action against companies or individuals that defraud the government. Fraudsters found liable under the False Claims Act must pay triple damages, penalties and attorneys’ fees. Under the False Claims Act, whistleblowers may be eligible to receive up to 25 percent of any money recovered by the government as a result of information they provide.

Twenty-nine states and the federal government have passed False Claims Acts, but only New York’s Act expressly covers tax fraud as a result of a landmark law authored by Attorney General Schneiderman. In 2011, as one of his first acts in office, Attorney General Schneiderman created the “Taxpayer Protection Bureau,” which is charged to work with whistleblowers and enforce the False Claims Act in tax and other government fraud cases.

The Office’s investigation of Sprint began with a whistleblower lawsuit – also called a “qui tam” action– filed in New York State Supreme Court in Manhattan in March 2011, just after the Taxpayer Protection Bureau was created. The Bureau, working with the New York State Department of Taxation & Finance, then conducted an extensive investigation and determined the extent of Sprint’s illegal conduct. By filing today’s complaint, the Attorney General has taken over the action from the whistleblower on behalf of New York’s taxpayers. If found liable, Sprint could be required to pay over $300 million to New York state and local governments, including school districts.

The Attorney General’s complaint also seeks to protect Sprint’s current customers to whom Sprint falsely marketed its wireless calling plans. Sprint promised its customers that it would collect and pay the correct amount of sales taxes on their behalf. The Attorney General seeks to ensure that Sprint — and not its customers — will be liable for any back taxes, and to empower Sprint’s current New York customers to terminate their Sprint contracts without having to pay termination fees.

David Koenigsberg of Menz Bonner Komar & Koenigsberg LLP, attorneys for the whistleblower, said, “Attorney General Schneiderman and his staff promptly and diligently investigated the whistleblower’s claims. This case shows that the New York Attorney General is putting to good use the tools provided by the robust New York False Claims Act that Attorney General Schneiderman expanded as a lawmaker. We look forward to working with his office to pursue this case in court.”

Neil Getnick, Chairman of Taxpayers Against Fraud, a national public interest organization dedicated to fighting fraud against federal, state, and local governments, said, “Attorney General Schneiderman’s action today has the potential to revolutionize tax fraud enforcement nationwide. His office has set a new standard in fighting corporate tax fraud with what we are calling the “New York Model”: enact a strong ‘False Claims Act’ that covers tax fraud; establish a team of dedicated prosecutors open to working with whistle-blowers; and let the facts dictate the result.”

Chuck Bell, Programs Director for Consumers Union said, “We applaud Attorney General Schneiderman’s action to protect consumers, businesses and governments from illegal sales tax evasion. Companies that properly collect sales taxes, and consumers that pay them, should not be put at an unfair disadvantage for following the law. Companies must be held accountable to their consumers when they promise to collect sales taxes and fail to do so.”

The Attorney General’s investigation is being conducted by Senior Counsel to the Taxpayer Protection Bureau Emily Bradford, Assistant Attorney General Lisa White, and Bureau Chief of the Taxpayer Protection Bureau Randall Fox, with assistance from the Director of Special Investigations of the New York State Department of Taxation & Finance Steve Krantz. Gregory Krakower, Senior Advisor and Counselor to the Attorney General and Nancy Hoppock, Executive Deputy Attorney General for the Division of Criminal Justice are supervising.